The slippery slope of buying points (On Nick’s mind)

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Yesterday, Greg published a post about buying Aeroplan points for 1.2c each. That’s a great deal — Aeroplan points are frequently worth much more. But yet despite the deal it is, I wasn’t very tempted to buy and that made me question the logic of some of my choices. After all, as Greg noted, we’re always buying points and I’ve been accumulating bank bonuses for the last couple of years. Why am I not a buyer of Aeroplan points at 1.2c each? I’m not sure I have a logical answer.

We’re always buying points

Greg made a point in the post that we’ve both written about before: we’re always “buying” points, even when indirectly. It is (almost) always possible to earn cash back in the games we play, so every time we choose to earn a point or mile, we’ve traded the opportunity to earn cash. That’s effectively like purchasing the miles.

The recent Betterment deal was a perfect illustration of this: shopping portal Rakuten briefly offered $127.50 cash back for opening a checking account with Betterment and depositing at least $1. Those of us who choose to earn Amex Membership Rewards points instead of cash through Rakuten earned 12,750 points. Choosing to earn points over cash in that situation is a clear trade: I could have had $127.50, but instead I took 12,750 points — effectively buying Membership Rewards points for 1c each.

In that case, it is a good trade. Not only am I confident that I’ll use Membership Rewards points at a better value, I know that it is possible to someday grab the Schwab Platinum card and cash out the points at a value of 1.25c each — which means that my Betterment Membership Rewards points are really worth $159.38 in cash (12,750 points x 1.25c per point = $159.38). By taking the bonus in Membership Rewards points, I added the flexibility to leverage one of Amex’s transfer partners or to convert to more cash in the future.

But not all trades are quite as strong. In the recent discussion about undervaluing airline miles, a couple of readers suggested that we should value miles based on the purchase price at which we (meaning the collective “we”) would be buyers. My first thought was that it is tough to say with certainty where my “buy” point is and I think that it logically changes based on circumstances. Greg said yesterday that he has a ton of Star Alliance miles from canceled trips, so he isn’t interested in buying more Star Alliance miles right now. Surely there would be some price point at which he would feel compelled to buy, but 1.2c wasn’t it. If he didn’t have those Star Alliance miles, maybe he would buy.

And yet both he and I and many readers buy points every day. Take dining spend as an easy example. The US Bank Altitude Go and Brex Cash card both offer 4% back on dining with no annual fee. I have the Brex Cash card, so any time I spend $1 on dining and choose to use another card, I am making a trade:

That last example is painful: a trade to pay 4 cents per point would never be worth it. However, I’ll admit to having used a Chase Ink Plus or Chase Ink Cash for a restaurant purchase when those cards were handy and others weren’t (in fact, I handed my wife her Chase Ink Cash card in the Panera drive-through just yesterday — don’t worry, the charge was only about $2, but it still represented a poor-value points purchase). In the case of Ultimate Rewards points at 1.33c each or Membership Rewards points at 1c each, neither is a bad deal given ways to cash out the points for greater value, but that’s not quite the whole story in either situation since you’ll also need a premium card to get those higher cash out rates. Suffice it to say that we make trades like this all the time when we swipe our credit cards. Each swipe comes at some cash cost. I am indirectly buying points on most of my purchases at a rate of 1c per point or less, but there have certainly been times when someone in my household has used a card that earns 1x or 2x in a situation where we could have alternatively used the Bank of America Premium Rewards card for 2.625% back given our Platinum Honors status. In those cases, we’ve purchased points at rates well over 1cpp (an error that I’ve been working to stop).

The age-old question: are points worth what they buy or what they save you?

The chicken-vs-egg debate of the points and miles world has long been where to value your points between what they buy you and what they save you. Some people thought that Greg should have figured the point value for Delta based on the cheapest cash rate of any carrier for the same city pairs/dates (in that case valuing points based on what they save the traveler based on the next cheapest alternative to using points), whereas others definitely want to fly Delta and thus thought Greg correct to value the points based on the price of the product they buy (after all, many people pay the cash price for that product even though it is more expensive than others).

Gary Leff at View from the Wing has long advocated for the value of miles being the price point at which you would be equally happy holding either points or cash. Take Membership Rewards points for instance. Someone who has the Schwab Platinum card may be equally happy holding points or cash if the price point were 1.25c per point. At that price point, the Schwab Platinum cardholder can convert to cash without losing any value (I acknowledge the collective cringe of the economists thinking of the time cost of money, but let’s keep things simple here) and they also gain the additional benefit of potentially using the points to much more value via Membership Rewards transfer partners. For someone who does not yet have the Schwab Platinum, the price point at which they are equally happy with points or money may be a bit lower given the extra hassle of having to apply for the Schwab card and be approved (though the welcome bonus more than mitigates the first-year fee). And for someone who has an immediate need for either the cash or the points, the price points at which they would trade would differ yet again. To be clear, all of those situations may apply to any individual depending on the sliver in time during which they are presented with the opportunity to buy more points (as evidenced by Greg’s declaration that he isn’t a buyer now but that he might be under different personal circumstances).

And so I found myself trying to decide at what price point I would be equally happy with cash or Aeroplan points and I found the answer more difficult than I thought.

Am I willing to spend the cash to buy premium cabin awards? Probably not.

Greg made a point in his post that those like me who have been riding the bank bonus train can look at those bank bonuses in terms of the points they buy. That’s an argument I’ve made before. I’ve said in the past that a $300 or $400 bank account bonus could be viewed as a 60,000-point or 80,000-point Hilton Honors bonus – without a new credit account – since those points are so frequently on sale for half a cent each.

Last year, my wife and I made about $4700 in bank account bonuses (new checking account and brokerage bonuses). This year, we are on track to eclipse that number. We have been collecting those bonuses intending to invest some of the money and use some of the money to cover travel expenses. Buying miles could certainly fit the definition of the latter.

And when I think of the potentially great uses of Aeroplan points and I follow the temptation to justify using my “found money” (earned from clicks of the mouse on those checking account bonuses) to buy a better travel experience than what the cash could otherwise buy, I am highly tempted to buy some points. In fact, I thought about Brex right away: the 110,000 points from the Brex Cash account (since expired) could be redeemed for $1100 which in turn could buy 91,000 Aeroplan points. Aeroplan offers (or will soon offer?) family pooling, so if my wife and I each redeemed our Brex bonuses for cash, we could combine forces and put together 182,000 Aeroplan miles. That would be enough Aeroplan points to buy 3 seats (for my wife, my older son, and me) to travel to Europe in business class while leaving us just 500 miles shy of a lap infant ticket for our youngest son (Aeroplan now charges 2500 miles for a lap infant regardless of class of service). Spending $2200 for that seems like a great deal on the surface.

But it bumps me up against the same dilemma I discussed last year when Chase debuted the ability to “Pay Yourself Back” for grocery purchases (available through 4/30/21): I have to ask myself whether I’m willing to spend $2200 on 3 (and a half) one way tickets to Europe.

In many instances, that would be a great deal for economy class. On last weekend’s podcast, Greg made an off-the-cuff remark about the reasonable and likely cost of economy class airfare to Asia being something like $1500 or $2,000 round trip. He’s probably right about that in a lot of instances. I know that many people spend similar sums to travel to Europe in economy class. And through that lens, trading $2200 for 182,000 Aeroplan miles is a fantastic trade that almost feels like a no-brainer for someone in position to do it.

However, I guess I don’t necessarily look at values in terms of average airfares. My wife and I were bitten by the travel bug long before we had the means to travel comfortably. Rather than choosing a destination and dates and planning a trip that fit those parameters, we long chose our destinations by price. When we saw an airfare deal that fit our budget, we went where it took us. Before we discovered miles and points, apart from one last-minute unexpected return from Europe that was more expensive, I don’t think we ever spent more than $500 round trip on airfare. And we did get to see some of the world: Ireland (albeit in January) for $250 round trip from New York, Abu Dhabi for $187 round trip from New York (an Etihad Christmas Day price mistake years ago that held up), Honolulu nonstop from New York for $450 round trip when that route debuted, and there were plenty more examples. We simply went where the (economy class) airfare sales took us. We had the advantage of not having kids in school (I do dread spending 20 years beholden to the school schedule), but the fact is that we were happy once to see the world one airfare sale at a time and could be happy doing that again. I fully recognize that many (most?) people would rather pick a destination and the best dates and plan a trip around that and as such would have a different perspective on airfare. But in my case, I would likely travel far less if I were actively considering $1,500 or $2,000 round trip fares.

And so I look at the Aeroplan award chart and ask myself: how much am I willing to pay per one way ticket? I certainly prefer to fly in premium cabins now that the magic of miles and points has spoiled me. But am I willing to pay 1.2c per point to do it? From North America, the business class ranges to various continents along with the cash equivalent at 1.2c per point are:

  • Atlantic Region (roughly Europe & Africa and Eastward to around India): 60K ($720) to 100K ($1200)
  • Pacific Zone (Asia and Australia/Oceania): 55K ($660) to 105K ($1260)
  • South America: 50K ($600) to 60K ($720)

Those ranges are fantastic compared to international business class fares. And back to the point about “normal” airfares, I’d say that those rates are probably quite good even in comparison to economy fares between regions in many instances. But I have to ask myself just how much cash I’m willing to trade for my family of 3 or 4 to visit these regions and that becomes more challenging. I look at the Atlantic region and ask if at the top end (100K points one-way) I would be willing to pay $1200 per passenger times 3 or 4 passengers in my family for one-way business class and the price seems steep. Round trip that would be like spending nearly $10,000 for four seats. Sure, I could earmark last year’s bank bonuses and this year’s bank bonuses to cover that type of trip – but would I really do that? For some readers, that could be an amazing savings (and once again, the ability to pool miles means that several family members could buy the limit of Aeroplan points and later combine them). However, I wouldn’t spend $10K on airfare for a single trip.

In my case, that is at least partially because I have ways to generate Aeroplan points for less than 1.2c each (most notably through Amex Membership Rewards welcome bonuses, category bonuses, and referral bonuses) and also because I’m just not willing to spend that much in cash for flights alone.

My answer would surely be totally different if I were just topping off part of the points needed for a big trip or if I were about to otherwise buy airfare and the sale would either save me money or cost me only marginally more than I would otherwise spend for airfare. But in this case, neither is true. I’ll hold out and continue to build my chest of points through big bonuses and cheaper point purchases via category bonuses and shopping portals.

But my feelings on this are clearly hypocritical

If I truly wouldn’t spend the cash to buy Aeroplan points at 1.2c each, how could I ever justify transferring points to Aeroplan? As I hinted at above, I’ll mentally justify the transfer someday when I want to book a trip by saying that I acquired Membership Rewards points at a much lower cost per point via welcome bonuses, referral bonuses, category bonuses, etc. Many of us play that mental justification game.

But the truth is that if I make a transfer to Aeroplan, it comes at the opportunity cost of not converting those points to cash at a rate of 1.25c per Membership Rewards point via the Schwab Platinum card. Essentially, if make a transfer to Aeroplan after this sale has ended, I will have indirectly paid 1.25c per Aeroplan point by choosing the points transfer over the cashout. That is a trade that I have made before and if I am being honest with myself it is a trade I am likely to make again in the future — and both then and someday when, I imagine I’ll have pushed the cash cost out of my mind when hitting the transfer button.

And so that circles me back to the sale here: should I be buying Aeroplan points for 1.2c each? My behavior says that I should (I’ve transferred more-valuable Membership Rewards points before and I say I am likely to do it again). It doesn’t logically make sense, but I probably won’t trade cash now to be able to cash out my points for (slightly more) value in the future.

It does make me wonder though at what price I am willing to part with cash for points? That brings me back to dining spend: I’m generally happier earning a transferable currency than cash for dining spend, so my purchase point for transferable points is somewhere between 1c and 1.33c per point. My purchase point for specific airline miles then has to be lower. If that’s true (and I’m still not totally convinced that it is), it means I likely won’t ever be buying airline miles directly unless topping up an account for a quick redemption since nobody sells their miles for less than a penny each. That’s OK on the one hand – I usually don’t recommend buying miles without a specific near-term use in mind. But I am still troubled by my reluctance to trade less cash now for Aeroplan points than I will likely trade later by giving up Membership Rewards points for Aeroplan points. I suppose the spread (0.05 cents) isn’t enough to trade cash right now. At least, that’s part of the story I’ll tell myself for the moment.

But very much like Chase stole my joy of free when they made points easy to cash out at 1.5c each, Aeroplan’s latest sale will make me re-think my future transfers from Membership Rewards in terms of cash value. That’s good on the one hand, but less fun than I usually like miles and points to be.

Bottom line

Yesterday’s sale on Aeroplan points made me stop and think because I think I value Aeroplan points at more than 1.2c each, but I don’t feel a compulsion to buy them at that price. I had to ask myself why not? And after all of the above thought, I came back to the question “At what price point am I a buyer of Aeroplan points?” Surely I’d buy at half the current sale price (0.6c per point) as that would make business class awards only marginally more expensive than the cheapest economy class fare sales (and likely a premium I’d realistically be willing to pay to fly my family up front). But where does my purchase point stop? And what does it say that I’ve willingly (albeit indirectly) purchased them for more in the past and would likely do so again in the future? Maybe I’m feeling a pull towards cash back and away from points. I would be far from the only person to have felt that change over time. The kid in me still wants to fly up front and stay at fancy resorts using the funny money I collect through the games we play – and truthfully, I’ll probably still do a lot of that. But the math is keeping me honest and some time away from travel has gotten me to reevaluate some. This sale will be on my mind long after it is over — not so much for the opportunity I missed as for what it means about my redemption patterns in the future.

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